A16z, YGG, Axie Roundtable: What's Next for Web3 Games?

Below is a transcript of conversations on the topic of NFT in the game, including Aleksander Larsen, co-founder and COO of Sky Mavis/Axie Infinity, Gabby Dizon, co-founder and CEO of Yield Guild Games, and Jonathan Lai, general partner of a16z. The dialogue took place at an event hosted by a16z during GDC 2022. The following is compiled by The Way of DeFi.

Jon: Thank you all for joining the roundtable. I'm Jon, a general partner at a16z. Today we're talking about topics that everyone cares about at GDC, namely NFT, Web3, and the impact of both in gaming. So I'm honored to have two of the biggest names in the Web3 gaming industry join us. Aleks Larsen, co-founder and COO of Sky Mavis, the company behind Axie Infinity, and Gabby Dizon, co-founder of Yield Guild Games.

Let's get started. Aleks and Gabby, over the past year, we've heard a lot about how NFT and Web3 games are going to completely change the way gaming is played, and the way the industry evolves. Let's break it down into concrete details. First, from the player's perspective, what can we do today with NFTs or other Web3 primitives that were previously impossible?

Gabby: As a player from a developing country, the Philippines has always been one of the soft-start countries for gaming because there are a lot of people who like gaming who are very socially active. But people aren't always able to get real-world rewards for the time and skill they spend in games. Now with in-game NFTs, people can own their own assets and then participate in the game economy. So it means a lot to people from our country and other developing markets who are able to participate in the game economy like Axie Infinity. It enables players to own digital assets that have their own value in the form of NFTs, such as Axies or Tokens. It really changed the way people look at games. I think almost 2% of Filipinos play Axie Infinity, so it's a huge game changer for the whole crowd.

Aleks: I think one of the things we've seen at Axie is higher engagement and retention, and people are actually more concerned about those assets than they used to be when renting games from game studios. When we think about what an NFT actually is, it's part of your digital identity. So, I truly believe that part of the reason we built Axie and Sky Mavis is that we want people to have their own data. And when you start your online journey, especially young people, a lot of time is spent in games. Whenever you play a game, I firmly believe that you should have something that belongs to you. And this is represented by NFTs.

This makes sense for a lot of people. And it's actually not just about the value of money. It's about people's emotional connection to these game assets. In the past, if the game was shut down, the player would disappear. But now, you've at least some tangible evidence to prove, "Hey, I did do this in that game." "So, for me, it's really important. And I don't think that was possible before. So while money is the direct reason for attracting people in, I believe they will stay because of other things and make them unique.

Jon: It's very interesting that one of the first things you mentioned is ownership. These are the concepts of digital assets that no one can take away from you. If the game is shut down, if Axie Infinity hangs up tomorrow, your Axies are still in your wallet. You can trade them, they have some intrinsic value. A common rebuttal we've gotten from many Web2 developers is that digital ownership may just be a policy change for Web2 game developers with existing games. For example, in World of Warcraft, they can only allow people to trade accounts with gold coins. In Diablo, there was a time when there was a real money auction house where people could buy and sell weapons and armor they found in the game. If you take it a step further, what makes Web3 and NFTs special beyond the ability to own and trade digital items?

Aleks: It's actually about what I mean by identity. Players spend years building game assets in games like World of Warcraft. The items they get are valuable to them because they spend time acquiring them, not to sell value. If they quit, then they don't necessarily have these game assets if they want to come back and prove to others that they did these cool things. Game developers can easily delete these assets.

GABBY: Yes. NFTs are digital possessions, digital simulations of owning a magic card or owning a baseball. You can play different rules, or use magic cards to play different magic tricks. You can also compose your own game entirely around these assets. The same goes for baseball. You can play it with your friends in an organized way, or you can play the game in your backyard. Owning an NFT transfers the concept of having digital ownership to the digital world.

Jon: For developers, if they're making games, how should they think about NFTs and explore Web3? We're seeing a huge number of game developers coming from the Web2 world to Web3. What motivates them? What's exciting?

Aleks: We talk to a lot of game developers and they're curious. "How did this innovation happen? What is the dual-token model? What is SLP? "To be honest, a lot of them are experimenting and trying to figure out what this new technology can bring. For game developers entering the space, they have to take a very hard look at tokens. I stress to many entrepreneurs how important these tokens are, especially those trying to raise capital by selling tokens. Because the liquidity that players have immediately, or the liquidity that investors have immediately, is something that you as a game studio or developer have to maintain over the long term.

Instead of selling NFTs to raise some money, really reward early community members and connect them to your community by giving them NFTs. I think it's actually subverting the script. Because when you sell something to a player, they feel like you owe them something. But when you give players something, they feel like they owe you something in return. And this gratitude is very strong. It's also the way you need to really start building your core community.

Gabby: My view of the difference between Web2 and Web3 is that assets are the underlying layer - NFT is the underlying layer of your IP. Instead of thinking about the game and then thinking about what asset to put out there, what do you actually have to think about is what is the underlying asset itself? Let's take Yuga Labs as an example. The first is to hold bayc, and then get the airdropped serum to create a second NFT, which is MAYC. So, you're actually creating your world with those assets one by one. When you have this foundational asset, you need to think, what does it mean to create a three-month gaming experience for the community, or a six-month gaming experience, or a two-year gaming experience? Maybe an MMO (Massively Multiplayer Online Game) will take five years to build. All of these use the same layer of underlying assets to reward your community, not only with different experiences, but also with different assets that they can acquire by holding your underlying assets.

Jon: I find Yuga Labs and what they're doing on ApeCoin really fascinating because I think it's a great example of bottom-up game building. They basically gave the community a set of basic elements, the NFT itself, and told them, "Hey, we want to build a universe around this." "Then they put commercial rights, in many cases, to NFT holders. How do you reconcile this with the traditional game development model? When you have a centralized game studio, an organization like Sky Mavis, maintaining a balanced creative vision in the game to make sure things are fun to play and that there are no cheaters, etc., do you feel that these approaches are inconsistent? How are they reconciled?

Aleks: Sky Mavis's approach is, in a sense, hybrid. What are they doing when I'm watching Yuga Labs? They are giving away commercial rights to use BAYC. It's good to unleash creativity. As a game developer, from the beginning, we've been trying to gradually decentralize. In Axie, users can earn a significant monetary value, but if they want to participate more deeply in the ecosystem, they need to make an agreement with us. We are working to align incentives with those who hold the underlying token, such as AXS in our case. The generated revenue is either returned to the player or goes into our treasury, which then benefits token holders.

For ApeCoin, I have a stronger opinion because I am not bullish on the currency Token. I think Token needs to have a clear way for people to collect some kind of value, whether it's money flow or governance. Just using it for trading or bartering, I don't think it really makes the price go up, and that's exactly what a lot of things actually mean. I'd rather focus on why people want to hold this token? Especially if you're going to release a token. Make people willing to hold your assets for a long time, rather than just using it as a currency.

Gabby: It's really hard to build a game. But there's a lot of stuff that the NFT and Web3 communities have given them. One of my favorite examples is RTFKT and CloneX, which started out as some NFTs. But then they launched another NFT, SpacePods, similar to a physical 3D space that allows people to decorate. A lot of people have actually entered as creators and are decorating their own pods and even learning Blender for them. So, make your community feel, "I'm the real master of this economy, and I can co-create with developers." "Of course, you can also set some boundaries. For example, there is a core game experience that only developers can create.

Aleks: Structure.

Gabby：... But if you can create a sandbox for the community to really play with and take ownership of, you're going to really see long-term loyalty that can't be seen in any other type of game.

Jon: One of the challenges we had in Web3 today was that there weren't that many players. To take a personal example, two nights ago, I played through Elden Ring, a best-selling premium control game. Last month, 12 million people played elden ring. But to my knowledge, there isn't a single blockchain game that has cumulatively had 12 million players, let alone monthly activity. What do you think it will take to achieve The Elden Ring level of success in blockchain games?

Aleks: Right now in Axie, we have about 1.6 million daily active players. And this is a game that has not been launched in any app store. You can't download the game on iOS. The only way to get the game on Android is to download the APK directly. What would happen if we could lower the barriers to entry even further? This is not to say that as a developer to make a lot of money, but to give some return, because the gamer will always be taken for granted, but in fact it is squeezed to the extreme, especially by the mobile game studio.

Gabby: By the way, I'm a mobile game developer.

Aleks: As mobile game developers today, if we go down this path, we'll find that the worst thing is actually not the game developer, but the middleman, and the way you have to spend money on ads. Now, what blockchain games can do is you can market directly to consumers by putting tokens in, which is why Axie Infinity is able to gain so many users in such a short period of time. By the end of last year, we had gone from 36,000 to 2.5 million today. By lowering the bar even further, people can play for free and still experience the magic that surrounds Axie. That's why these data are reached.

Gabby: I can represent how players are now participating in the game guild, so I'll talk about that. We founded YGG based on the Axie community. The community found that you can actually lend your NFTs to others through a dual sign-in system without having to hand over access to your wallet. If I give you a username and password without giving you access to my blockchain wallet, you can experience the game and earn value without having to trust the person who owns your assets. So we've been doing this since 2020, and now, it's really blown up in the Philippines and some other parts of the world. We're a bit like a community of players, or running as a DAO (Decentralized Autonomous Organization) that is currently buying assets for different kinds of games. We have now purchased assets for over 40 games. Whether it's a card game, a strategy game, or an RPG game, we now have assets that allow players to come in and enjoy those games and make money without having to buy NFTs. Of course, if the player likes it very much, then they may buy something later.

Now, YGG has grown tremendously, and many of them are in developing regions such as Southeast Asia, India, and Latin America, where people are playing these games and earning supplementary income. But I think we're going to see an evolution similar to the guilds with bank accounts in World of Warcraft. The guild itself can buy a castle or a kingdom, which will produce buildings. And people will come in and harvest resources. The ones who are competitive will be those warriors who will fight PvP against everyone else. So, having such a guild layer on top of a digital asset gives you new game essentials that you've never seen before.

Jon: Gabby, the topic of the DAO, maybe just a controversial one... Today's DAO has basically become the publisher of Web3 games? If you're working on a new Web3 game, you want YGG to take a look at the token design, look at the game design documentation, and sign it. That way, your community, your academics, and fellowship administrators will all know that this is a legitimate program and that they should put their time and money behind it. Do you think there's a world where THE DAO actually becomes too powerful in that light? Because they've actually become the gatekeepers of future Web3 games and dApps in general. How did you think about this as you built your company and grew?

Gabby: That's a very good question. I think the way you win and create value in Web3 is very different than it used to be. Previously, if you had something proprietary, you wanted to gate it and charge for it, which is why Facebook and Google have grown so much on their algorithms. In Web3, the way you grow is through composite network effects, which means that if YGG joins and helps launch a game, helps with token design, and buys assets, we don't control the addition of other guilds. We're designed so that hundreds of other guilds can join in, enjoy the game, and have a thriving economy. We actually reduce network effects by gatekeeping, and therefore reduce the value of what we do. This is truly the core difference in value creation between Web2 and Web3.